[startupcfo]

Black Co. requires advance payments with special orders for machinery constructed to customer specifications. These advances are nonrefundable. Information for 20X1 is as follows:

Customer advances balance December 31, 20X0 $118,000
Advances received with orders in 20X1 184,000
Advances applied to orders shipped in 20X1 164,000
Advances applicable to orders canceled in 20X1 50,000

In Black’s December 31, 20X1, balance sheet (statement of financial position), what amount should be reported as a current liability for advances from customers?

Incorrect A.
$0

B.
$88,000

C.
$138,000

D.
$148,000

Why isn’t the answer A? These are non-refundable payments, am I right? that means once you receive money, there’s no liability attached to it, so liabilities always = zero?

BEC - 87 | 02/28
REG - 70 | 06/10, REMATCH | 08/30
AUD - XX | 09/10
FAR - XX | 12/10

[Stilgoin]

Advance payments create a liability for the company. Revenue is recognized when it is earned. Advances = 88,000 that has not been earned for 2011. Is B correct?

B | 62, 78
A | 73, 67, 79
R | 82
F | 59, 59, Waiting

Ethics | 93

"Success is not final, failure is not fatal: it is the courage to continue that counts."
~Winston Churchill

“In a world full of critics, be an encourager."

[fragchild]

Even though it is non-refundable, you still have a obligation (i.e. liability) to provide the goods or services. It's only when the customer cancels that you no longer have an obligation (i.e. non-refundable) and therefore no liability.

[CPA so close, so far away]

Yes. It all comes down to the basic revenue recognition criteria. It has not been EARNED yet. If the customer cancels, then it is technically EARNED at that point.

[Author]

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